Lead WorksheetCapital Budgeting Analysis forSupplemental Material for Short Course 3: Capital Budgeting Analysis, located on the internet at www.exinfm.com/training. Prepared by: Matt H. Evans, CPA, CMA, CFMMedical Services USA

Purpose of Spreadsheet Lead WksIllustrate concepts related to capital budgeting analysis of projects. Certain aspects of a capitalProject Aproject may have not been included in order to help highlight basic concepts, such asProject BNet Present Value. The spreadsheet is setup to evaluate six different projects and summarizeProject Call projects based on both economic analysis and risk factors assigned.Project DNote: The Solver feature of Excel is used in an example at the end. Please make sure that youProject Ehave installed Solver:Solver add-on feature (Tools => Add-Ins => Solver).Project FSummaryEconomic AnalysisThree economic criteria are applied to projects: Net Present Value, Modified Internal Rate ofReturn and Discounted Payback Period. If your project(s) have non-periodic payments(payments are not equal over the life of the project), then you should use these Excel Functions:=XNPV for Net Present Value by entering specific dates of cash flows=XIRR for Internal Rate of Return by entering specific dates of cash flows

Cell IndicatorsCertain cells are highlighted as follows:Selected input cells (not all input cells are highlighted since each project is unique)
Matt H. Evans: Cells with a red triangle in the upper right corner have commentsCell includes a comment - move mouse and point over cell for commentIndication of an error in calculation or a red flag that a criteria has not been metOrganization of SpreadsheetLead WorksheetProject A Analysis - Example with Annual Cash Flow CalculationsProject B Analysis - Example with Sunk Costs & Projected FinancialsProject C Analysis - Example of Upgrade InvestmentProject D Analysis - Example of Project FinancingProject E Analysis - Example of Foreign InvestmentProject F Analysis - Example of Monthly Inflows / OutflowsSummary and Example of Using Excel SolverAnswer Report 1 - Output from Using Excel Solver in Summary ExampleGeneral InputThe following general inputs have been used on different worksheets:ADiesel Generation SystemF Priority >2Preliminary ReviewAssign points from 0 to 5 for each of the following project attributes. 0 indicates that the attribute does not apply to the project. 5 is the highest rating, indicating that the project strongly meets this project attribute.Financial Attributes:F1Project improves overall profitability of the company2F2Project lowers cost structure3F3Project will generate a rate of return3F4Project improves asset utilization1F5Other Financial Attribute __________________________________0F6Other Financial Attribute __________________________________0

Operating Attributes:O1Improves operating efficiencies4O2Increases the customer base0O3Improves overall customer service0O4Improves competitive position of company0O5Other Operating Attribute _________________________________0O6Other Operating Attribute _________________________________0

Contingency Attributes:C1Project has options that allow for change during life2C2Project will positively impact company even if value is negative4C3Project can be abandoned easily with some positive value1C4Project permits several options to maximize value2C5Other Cont Attribute _____________________________________0

Miscellaneous Attributes:M1Expands Human Resource Capital0M2Enhances workforce productivity0M3Project meets a critical regulatory, security or specific need0M4Project fits with company strategy and goals1M5Probability of project success is very high / low risk4M6Other Misc Attribute _____________________________________0M7Other Misc Attribute _____________________________________0M8Other Misc Attribute _____________________________________0

Total Preliminary Points27

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceedwith analysis and submission.

Financial Analysis Proposed Project Expenditure:*Equipment & Facilities (purchase price)
Matt H. Evans: Quote from vendor selected in bidding process.165,000*Installation Cost650*Labor
Matt H. Evans: In house personnel to assist with installation and testing during first week.4,500*Materials
Matt H. Evans: Initially, purchase of diesel fuel for storage and testing.250*Shipping1,280*Taxes11,550Other Costs (expensed)350Intial Cash Outlay for Project183,580Tax Breaks for Investment
Matt H. Evans: Not recovered until three months after project is complete.(1,500)Sale of Existing Assets0Tax Benefit on Loss - Sale of Assets0Total Project Investment182,080Project Analysis Required?Yes

*capitalized costs subject to depreciation using double declining method over 8 years with $ 8,000 salvage valueNOTE: Depreciation for tax purposes is considered the same for accounting purposes. If tax depreciation isdifferent than accounting depreciation, deduct tax depreciation in calculating taxes.Cash Flows associated with Project:Year 1:Reductions in annual operating costs28,900New revenues from higher output volumes6,200Eliminate third party vendor service35,000Annual service and maintenance(4,600)Annual fuel costs(1,500)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr1(45,808)Operating Cash Flow in Year 118,193Less Taxes(5,003)Net Income - Year 113,190Add Back Non Cash Depreciation45,808Change to Net Working Capital(3,500)Net Cash Flow - Year 155,497

Year 2:Reductions in annual operating costs32,100New revenues from higher output volumes6,900Eliminate third party vendor service35,000Annual service and maintenance(5,000)Annual fuel costs(1,800)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr2(34,356)Operating Cash Flow in Year 232,844Less Taxes(9,032)Net Income - Year 223,812Add Back Non Cash Depreciation34,356Change to Net Working Capital(650)Net Cash Flow - Year 257,518Year 3:Reductions in annual operating costs34,800New revenues from higher output volumes7,100Eliminate third party vendor service35,000Annual service and maintenance(5,000)Annual fuel costs(2,000)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr3(25,767)Operating Cash Flow in Year 344,133Less Taxes(12,137)Net Income - Year 331,997Add Back Non Cash Depreciation25,767Change to Net Working Capital(550)Net Cash Flow - Year 357,213Year 4:Reductions in annual operating costs37,200New revenues from higher output volumes7,900Eliminate third party vendor service0Annual service and maintenance(5,200)Annual fuel costs(2,100)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr4(19,325)Operating Cash Flow in Year 418,475Less Taxes(5,081)Net Income - Year 413,394Add Back Non Cash Depreciation19,325Change to Net Working Capital(250)Net Cash Flow - Year 432,469Year 5:Reductions in annual operating costs40,900New revenues from higher output volumes8,900Eliminate third party vendor service0Annual service and maintenance(5,300)Annual fuel costs(2,200)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr5(14,494)Operating Cash Flow in Year 527,806Less Taxes(7,647)Net Income - Year 520,160Add Back Non Cash Depreciation14,494Change to Net Working Capital(350)Net Cash Flow - Year 534,303Year 6:Reductions in annual operating costs44,200New revenues from higher output volumes9,700Eliminate third party vendor service0Annual service and maintenance(5,400)Annual fuel costs(2,300)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr6(10,870)Operating Cash Flow in Year 635,330Less Taxes(9,716)Net Income - Year 625,614Add Back Non Cash Depreciation10,870Change to Net Working Capital(150)Net Cash Flow - Year 636,334Year 7:Reductions in annual operating costs50,100New revenues from higher output volumes10,200Eliminate third party vendor service0Annual service and maintenance(5,500)Annual fuel costs(2,400)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr7(8,153)Operating Cash Flow in Year 744,247Less Taxes(12,168)Net Income - Year 732,079Add Back Non Cash Depreciation8,153Change to Net Working Capital(150)Net Cash Flow - Year 740,082Year 8:Reductions in annual operating costs55,500New revenues from higher output volumes11,000Rebuild / Repair Unit Option(25,000)Annual service and maintenance(4,600)Annual fuel costs(2,600)Depreciation:Cost183,230Salvage Value8,000Useful Life8Depreciation in Yr8(6,115)Operating Cash Flow in Year 828,185Less Taxes(7,751)Net Income - Year 820,434Add Back Non Cash Depreciation6,115Change to Net Working Capital(50)Net Cash Flow - Year 826,499

Terminal Year 9Salvage Value of Asset5,000Working Capital Reversed2,500Terminal Value7,500

At the end of Year 8, a decision will be made to either rebuild the asset or outsource to third party.Economic Analysis Summarize Cash Outflows and Inflows for Project:CashPresent RecoveryYearFlowsValuePayback0(182,080)(182,080)155,49749,997(132,083) 257,51846,683(85,400) 357,21341,834(43,566) 432,46921,389(22,177) 534,30320,357(1,820)636,33419,42617,60611.00%Reinvestment Rate for Project =>6.00% Net Present Value$51,342 Modified IRR11.03%Discounted Payback (years)6.1Economic AssessmentProject has positive Net Present Value?YesProject has IRR in excess of cost?YesProject has a positive payback?YesProject must meet at least two of the three Economic Criteria, otherwise specialapproval is required.Risk AnalysisRisk Premium Applied to Project 1.50%Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:Risk Ranking = 1 for lowest possible risk up to 10 for highest possible riskProbability of Accurate and Reliable Information - Gov't T Bond
Matt H. Evans: There are usually very few unknowns concerning a Government Treasury Bond; yields, payments, and other attributes are usually very certain and thus, the probability of reliable information is extremely high for such an investment.1.00(a)Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)1(b)Exponential power to apply to Risk Ranking is 2 - (a)1(c)Risk Factor = (b) raised to the power (c)1Probability of Accurate and Reliable Information for Project0.6Risk Ranking assigned to project (1 to 10)5 Exponential power to apply to Project1.4Risk Factor for Project 10 Assign probabilities to three possible outcomes for project:PPesimistic outlook, declining growth, slower volumes, etc.25.00%NNormal expected outlook as applied in analysis60.00%OOptomistic outlook, better than expected growth15.00%Total should equal100.00%100.00%Enter Expected Cash Flows for different outcomes:

StandardCoeff ofNet Cash FlowsExpectedDeviationVariationYearPesimistNormalOptomistValue(Abs Risk)(Rel Risk)141,80055,49764,90053,48317,7580.332239,75057,51867,30054,54321,5840.396337,40057,21366,10053,59322,8540.426426,20032,46941,05032,18910,6990.332521,05034,30340,90031,97915,6790.490613,20036,33439,80031,07122,5310.725711,80040,08240,80033,11925,4300.76888,10026,49935,70023,27921,7930.936Terminal1,0007,5008,5006,0256,3461.053Totals200,300347,416405,050319,282164,6740.516Absolute Risk of Project (Std Deviation)164,674Relative Risk of Project (Coeff of Variation)0.516

Revised Economic Analysis using Expected ValuesExpectedPresentRecoveryYearValueValuePayback0(182,080)(182,080)153,48348,183(133,897)254,54344,268(89,628)353,59339,187(50,442)432,18921,204(29,238)531,97918,978(10,259)631,07116,6126,352payback733,11915,95222,304823,27910,10232,40696,0252,35534,761Totals 34,761 Net Present Value$34,761 Modified IRR10.07%Discounted Payback (years)6.6

Project BCapital Budgeting Analysis forMedical Services USABNew Clinic in Kansas CityProject InformationProject Description >New Walk In Clinic - Kansas CityProject Benefits >Toehold market position, profit center, business expansionProject Location >Kansas CityResponsible Division >Mid WestResponsible Department >Business DevelopmentContact Person Name >Bill Watson, Operations DirectorEstimated Project Start Date >04/01/92Classification >2 Justification >CPriority >3 Preliminary ReviewAssign points from 0 to 5 for each of the following project attributes. 0 indicates that the attribute does not apply to the project. 5 is the highest rating, indicating that the project strongly meets this project attribute.Financial Attributes:F1Project improves overall profitability of the company3F2Project lowers cost structure2F3Project will generate a rate of return4F4Project improves asset utilization2F5Other Financial Attribute __________________________________0F6Other Financial Attribute __________________________________0

Operating Attributes:O1Improves operating efficiencies2O2Increases the customer base3O3Improves overall customer service3O4Improves competitive position of company2O5Other Operating Attribute _________________________________0O6Other Operating Attribute _________________________________0

Contingency Attributes:C1Project has options that allow for change during life0C2Project will positively impact company even if value is negative0C3Project can be abandoned easily with some positive value0C4Project permits several options to maximize value0C5Other Cont Attribute _____________________________________0

Miscellaneous Attributes:M1Expands Human Resource Capital0M2Enhances workforce productivity0M3Project meets a critical regulatory, security or specific need0M4Project fits with company strategy and goals3M5Probability of project success is very high / low risk0M6Other Misc Attribute _____________________________________0M7Other Misc Attribute _____________________________________0M8Other Misc Attribute _____________________________________0

Total Preliminary Points24

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceedwith analysis and submission.

Financial Analysis

Proposed Project Expenditure: Rework / Upgrade Existing Building85,000(1)Equipment and Fabrication45,000(2)Marketing and Promotion of Clinic7,500Contingency Costs
Matt H. Evans: A contingency provision for unexpected costs is added into the investment estimate.3,500Market Study / Research
Matt H. Evans: A market study was conducted to ascertain if a new clinic would be profitable in Kansas City. The study is made regardless of the investment decision and therefore, it is not a relevant cost associated with the investment; it is sunk regardless if the project goes ahead or not.2,500302,8332,8332,8332,8332,8332,8332,8332,8332,8332,8332,500Equipment 126,9236,3465,7695,1924,6154,0383,4622,8852,3081,7310Operating Cash Flow22,49420,77931,22343,69644,13448,19748,34549,94351,90452,41447,450Net Working Capital(6,500)(7,500)(10,000)(12,500)(13,500)(14,000)(14,500)(14,900)(15,300)(15,500)(16,000)Planned Critical Cash Outlays(1,500)(2,500)(3,500)(500)0000000Total Cash Flow14,49410,77917,72330,69630,63434,19733,84535,04336,60436,91431,450

Economic Analysis Summarize Cash Outflows and Inflows for Project: CashPresent YearFlowsValuePayback0(141,000)(141,000)114,49412,883(128,117)210,7798,517(119,599)317,72312,447(107,152)430,69619,163(87,989)530,63417,000(70,990)634,19716,868(54,121)733,84514,840(39,282)835,04313,658(25,624)936,60412,681(12,943)1036,91411,368(1,575)1131,4508,6097,033payback1231,4507,65214,6861331,4506,80221,4881431,4506,04627,534 1531,4505,37432,9081631,4504,77737,6861731,4504,24641,9321831,4503,77545,7071931,4503,35549,0622031,4502,98252,044Net Present Value52,044Required Rate of Return for Project =>12.50%Reinvestment Rate for Project =>7.50%Net Present Value $52,044 Modified IRR11.36% Discounted Payback (years)11.18Economic AssessmentProject has positive Net Present Value?YesProject has IRR in excess of cost?NoProject has a positive payback?YesProject must meet at least two of the three Economic Criteria, otherwise specialapproval is required.Risk AnalysisRisk Premium Applied to Project 3.00%Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:Risk Ranking = 1 for lowest possible risk up to 10 for highest possible riskProbability of Accurate and Reliable Information - Gov't T Bond
Matt H. Evans: There are usually very few unknowns concerning a Government Treasury Bond; yields, payments, and other attributes are usually very certain and thus, the probability of reliable information is extremely high for such an investment.1.00(a)Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)1(b)Exponential power to apply to Risk Ranking is 2 - (a)1(c)Risk Factor = (b) raised to the power (c)1Probability of Accurate and Reliable Information for Project0.5Risk Ranking assigned to project (1 to 10)7 Exponential power to apply to Project1.5 Risk Factor for Project 19Assign probabilities to three possible outcomes for project:PPesimistic outlook, declining growth, slower volumes, etc.35.00%NNormal expected outlook as applied in analysis60.00%OOptomistic outlook, better than expected growth5.00%Total should equal100.00%100.00%Enter Expected Cash Flows for different outcomes:

StandardCoeff ofNet Cash FlowsExpectedDeviationVariationYearPesimistNormalOptomistValue(Abs Risk)(Rel Risk)18,65014,49426,80013,06413,8451.06026,80010,77927,50010,22315,0311.47037,90017,72333,20015,05919,7741.31348,60030,69637,80023,31725,8651.10958,10030,63443,90023,41030,4221.30067,50034,19742,10025,24830,7941.22077,10033,84541,85024,88430,9081.24286,20035,04340,95025,24331,5011.24896,00036,60440,20026,07231,6301.213105,50036,91439,90026,06831,9931.227115,10031,45037,75022,54329,3861.304124,90031,45035,95022,38328,3671.267134,25031,45034,15022,06527,7791.259143,70531,45032,99021,81627,5201.261153,25031,45031,65021,59027,0541.253162,68031,45031,28021,37227,3491.280172,00531,45031,00021,12227,8061.316181,49031,45030,85020,93428,1971.347191,10531,45029,99020,75627,9861.3482079031,45028,75020,58427,4541.334Totals101,625595,428698,560427,753540,6601.264

Absolute Risk of Project (Std Deviation)540,660Relative Risk of Project (Coeff of Variation)1.264

Revised Economic Analysis using Expected ValuesExpectedPresentRecoveryYearValuesValuePayback0(141,000)(141,000)113,06411,612(129,388)210,2238,077(121,311)315,05910,576(110,734)423,31714,557(96,177)523,41012,991(83,186)625,24812,454(70,732)724,88410,911(59,821)825,2439,838(49,983)926,0729,032(40,951)1026,0688,028(32,923)1122,5436,171(26,752)1222,3835,446(21,306)1322,0654,772(16,534)1421,8164,194(12,340)1521,5903,689(8,651)1621,3723,246(5,404)1721,1222,852(2,552) 1820,9342,513(40)1920,7562,2142,175payback2020,5841,9524,127Net Present Value4,127 Net Present Value$4,127Modified IRR9.68%Discounted Payback (years)19.02

Project CCapital Budgeting Analysis forMedical Services USACUpgrade to DuBois CenterProject InformationProject Description >Upgrade DuBois for unused capacityProject Benefits >Better use of facility, more incomeProject Location >IowaResponsible Division >Mid WestResponsible Department >FinanceContact Person Name >Cheryl Strickland, ControllerEstimated Project Start Date >03/15/92Classification >4 Justification >CPriority >3 Preliminary ReviewAssign points from 0 to 5 for each of the following project attributes. 0 indicates that the attribute does not apply to the project. 5 is the highest rating, indicating that the project strongly meets this project attribute.Financial Attributes:F1Project improves overall profitability of the company3F2Project lowers cost structure3F3Project will generate a rate of return4F4Project improves asset utilization4F5Other Financial Attribute __________________________________0F6Other Financial Attribute __________________________________0

Operating Attributes:O1Improves operating efficiencies4O2Increases the customer base3O3Improves overall customer service3O4Improves competitive position of company2O5Other Operating Attribute _________________________________0O6Other Operating Attribute _________________________________0

Contingency Attributes:C1Project has options that allow for change during life0C2Project will positively impact company even if value is negative0C3Project can be abandoned easily with some positive value0C4Project permits several options to maximize value0C5Other Cont Attribute _____________________________________0

Miscellaneous Attributes:M1Expands Human Resource Capital0M2Enhances workforce productivity0M3Project meets a critical regulatory, security or specific need0M4Project fits with company strategy and goals2M5Probability of project success is very high / low risk3M6Other Misc Attribute _____________________________________0M7Other Misc Attribute _____________________________________0M8Other Misc Attribute _____________________________________0

Total Preliminary Points31

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceedwith analysis and submission.

Cost Volume Profile of DuBois Facility

Personnel & Labor37.50Supplies and Inventory2.65Variable Adm Overhead3.60Fixed Overhead Costs10.50Total Unit Costs per Billable Hour54.25

Current Operating Capacity =>60%Maximum Capacity per month15,000billable hoursSales growth rates over the next ten years are estimated at 4% per year with increases to costs 1.03estimated at 1.5% per year for each variable component.1.015

Estimated Changes from Upgrade Investment

Upgrade Investment will result in additional 5,000 billable hours per monthNew Services from Upgrade Investment are billable to customers at $ 50.00 per hourCapacity after upgrade =>14,000Does upgrade project exceed max?No

Financial Analysis

Proposed Project Expenditure:Upgrade Systems & Facilities
Matt H. Evans: Modifications to technical equipment and processes to expand and introduce new services to existing customer base. These costs are not considered capitalized related expenditures.1,150,000Executive Management Time
Matt H. Evans: Senior Management from other locations will temporarily oversee upgrade project for successful implementation. 405,000Training and Promotion135,000Contingency Costs90,000Total Investment1,780,000Project Analysis Required?Yes

Annual< - - relevant annual costs to project - - >IncrementalPersonnelSuppliesVar AdmProfitsLessProjectAdj toCashYearRevenues& Labor& InventoryOverheadbefore TaxTaxesIncomeIncome
Matt H. Evans: The project is expected to tie up some minor amounts of working capial.Flow13,000,000(2,250,000)(159,000)(216,000)375,000(103,125)271,875(15,000)256,87523,090,000(2,283,750)(161,385)(219,240)425,625(117,047)308,578(13,000)295,57833,182,700(2,318,006)(163,806)(222,529)478,359(131,549)346,811(12,000)334,81143,278,181(2,352,776)(166,263)(225,867)533,275(146,651)386,625(12,000)374,62553,376,526(2,388,068)(168,757)(229,255)590,447(162,373)428,074(12,000)416,07463,477,822(2,423,889)(171,288)(232,693)649,952(178,737)471,215(12,000)459,21573,582,157(2,460,247)(173,857)(236,184)711,868(195,764)516,105(12,000)504,10583,689,622(2,497,151)(176,465)(239,727)776,279(213,477)562,802(12,000)550,80293,800,310(2,534,608)(179,112)(243,322)843,267(231,898)611,369(12,000)599,369103,914,320(2,572,627)(181,799)(246,972)912,921(251,053)661,868(12,000)649,868 Due to the rapid changes in services provided by this upgrade investment project, no terminal value was calculated for the periods beyond year 10. Economic Analysis Summarize Cash Outflows and Inflows for Project: CashPresent YearFlowsValuePayback 0(1,780,000)(1,780,000) 1256,875233,523(1,546,477) 2295,578244,279(1,302,198) 3334,811251,548(1,050,650) 4374,625255,874(794,776) 5416,074258,349(536,427) 6459,215259,215(277,212) 7504,105258,685(18,527)8550,802256,953238,427payback9599,369254,191492,618 10649,868250,552743,170Net Present Value743,170Required Rate of Return for Project =>10.00%Reinvestment Rate for Project =>4.00%Net Present Value $743,170 Modified IRR11.24%Discounted Payback (years)8.07Economic AssessmentProject has positive Net Present Value?YesProject has IRR in excess of cost?YesProject has a positive payback?YesProject must meet at least two of the three Economic Criteria, otherwise specialapproval is required.Risk AnalysisRisk Premium Applied to Project 0.50%Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:Risk Ranking = 1 for lowest possible risk up to 10 for highest possible riskProbability of Accurate and Reliable Information - Gov't T Bond
Matt H. Evans: There are usually very few unknowns concerning a Government Treasury Bond; yields, payments, and other attributes are usually very certain and thus, the probability of reliable information is extremely high for such an investment.1.00(a)Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)1(b)Exponential power to apply to Risk Ranking is 2 - (a)1(c)Risk Factor = (b) raised to the power (c)1Probability of Accurate and Reliable Information for Project0.7Risk Ranking assigned to project (1 to 10)4 Exponential power to apply to Project1.3 Risk Factor for Project 6Assign probabilities to three possible outcomes for project:PPesimistic outlook, declining growth, slower volumes, etc.20.00%NNormal expected outlook as applied in analysis65.00%OOptomistic outlook, better than expected growth15.00%Total should equal100.00%100.00%Enter Expected Cash Flows for different outcomes:

StandardCoeff ofNet Cash FlowsExpectedDeviationVariationYearPesimistNormalOptomistValue(Abs Risk)(Rel Risk)1212,500256,875285,700252,32454,9780.2182242,500295,578324,300289,27162,3010.2153301,200334,811362,050332,17444,8920.1354326,700374,625401,200369,02656,6380.1535370,900416,074441,300410,82353,4930.1306411,800459,215483,700453,40554,9490.1217461,900504,105533,100500,01353,2390.1068510,200550,802582,200547,39153,3230.0979561,300599,369631,100596,51551,3740.08610615,100649,868677,700647,08946,2300.0714,014,1004,441,3204,722,3504,398,031531,4190.121Absolute Risk of Project (Std Deviation)531,419Relative Risk of Project (Coeff of Variation)0.121

Revised Economic Analysis using Expected ValuesExpectedPresentRecoveryYearValuesValuePayback0(1,780,000)(1,780,000)1252,324229,385(1,550,615)2289,271239,067(1,311,548)3332,174249,568(1,061,981)4369,026252,050(809,931)5410,823255,089(554,842)6453,405255,935(298,907)7500,013256,586(42,321)8547,391255,362213,041payback9596,515252,980466,021 10647,089249,481715,502Net Present Value715,502Net Present Value$715,502 Modified IRR11.12%Discounted Payback (years)8.17

Project DCapital Budgeting Analysis forMedical Services USADSoutheastern UpgradesProject InformationProject Description >Upgrade to various Southeastern facilitiesProject Benefits >Better use of facility, more incomeProject Location >AtlantaResponsible Division >SoutheastResponsible Department >EngineeringContact Person Name >Bob FerrellEstimated Project Start Date >02/05/92Classification >4 Justification >CPriority >3 Preliminary ReviewAssign points from 0 to 5 for each of the following project attributes. 0 indicates that the attribute does not apply to the project. 5 is the highest rating, indicating that the project strongly meets this project attribute.Financial Attributes:F1Project improves overall profitability of the company2F2Project lowers cost structure2F3Project will generate a rate of return4F4Project improves asset utilization5F5Other Financial Attribute __________________________________0F6Other Financial Attribute __________________________________0

Operating Attributes:O1Improves operating efficiencies5O2Increases the customer base1O3Improves overall customer service2O4Improves competitive position of company3O5Other Operating Attribute _________________________________0O6Other Operating Attribute _________________________________0

Contingency Attributes:C1Project has options that allow for change during life0C2Project will positively impact company even if value is negative1C3Project can be abandoned easily with some positive value1C4Project permits several options to maximize value0C5Other Cont Attribute _____________________________________0

Miscellaneous Attributes:M1Expands Human Resource Capital0M2Enhances workforce productivity2M3Project meets a critical regulatory, security or specific need0M4Project fits with company strategy and goals2M5Probability of project success is very high / low risk2M6Other Misc Attribute _____________________________________0M7Other Misc Attribute _____________________________________0M8Other Misc Attribute _____________________________________0

Total Preliminary Points32

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceedwith analysis and submission.

Project Summary

Several facilities in the Southeast area need to upgrade existing scanner equipment to better serve customersand produce higher quality analysis / treatments. The Atlanta Bank has agreed to finance $ 500,000 towardsthe investment at 9% over a five year period. The loan repayment schedule is as follows:

InterestNumber of LoanInterestPrincipalTotalTax BenefitRateInstallmentsYearBalancePaymentPaymentPaymentof Interest0.0951500,000(45,000)(83,546)(128,546)12,3752416,454(37,481)(91,065)(128,546)10,3073325,388(29,285)(99,261)(128,546)8,0534226,127(20,351)(108,195)(128,546)5,5975117,932(10,614)(117,932)(128,546)2,919

Financial Analysis

Proposed Project Expenditure:Total Upgrade Acquisition Price1,650,000(1)Installation / Training / Other Costs65,000Total Investment1,715,000Financed through Bank(500,000)Net Cash Outlay1,215,000Project Analysis Required?Yes

(1): $ 650,000 of this price is subject to capitalization. Depreciation deducted on the tax returndiffers from depreciation for accounting purposes:Tax ReturnAccountingTax BenefitYearDepreciationDepreciationDepreciation1325,00065,00089,3752162,50065,00044,688381,25065,00022,344440,62565,00011,172540,62565,00011,1726 65,000765,000865,000965,0001065,000Total650,000650,000Cash Flow Analysis #1 - Only Project Cash Flows
Matt H. Evans: When a project is financed, we can either include the cash flows associated with financing (principal and interest) or we can exclude the financing cash flows and focus on only the project related cash flows. Since the discount rate accounts for the cost of financing, the preferred approach is to analyze only project cash flows and ignore financing flows since they are accounted for within the discount rate. If you decide to include financing cash flows, then make sure you use a discount rate that matches the cost of financing the project. ServiceOther DepreciationTaxableLessNetAdd BackWorkingCashYearRevenuesCostsCostsDeductionIncomeTaxesIncomeDepreciationCapitalFlow1535,800(112,000)(38,000)(325,000)60,800(16,720)44,080325,000(29,500)339,5802585,900(155,100)(46,500)(162,500)221,800(60,995)160,805162,500(33,100)290,2053612,600(188,600)(54,100)(81,250)288,650(79,379)209,27181,250(35,600)254,9214636,050(202,900)(63,200)(40,625)329,325(90,564)238,76140,625(37,900)241,4865644,112(224,200)(68,900)(40,625)310,387(85,356)225,03140,625(38,400)227,2566653,500(241,600)(72,110)339,790(93,442)246,348 (39,200)207,1487668,200(258,800)(77,800)331,600(91,190)240,410 (40,400)200,0108677,400(272,100)(83,100)322,200(88,605)233,595 (41,200)192,3959689,800(287,800)(88,900)313,100(86,103)226,998(41,900)185,09810705,300(298,400)(94,200)312,700(85,993)226,708(42,300)184,40811712,900(309,100)(97,800)306,000(84,150)221,850(42,800)179,05012719,600(319,400)(101,050)299,150(82,266)216,884(43,600)173,28413722,800(325,400)(104,900)292,500(80,438)212,063(44,100)167,96314729,100(329,900)(107,800)291,400(80,135)211,265(44,600)166,66515734,300(334,100)(110,100)290,100(79,778)210,323(45,100)165,223

Economic Analysis #1PresentYearCash FlowValuePayback0(1,215,000)(1,215,000)1339,580303,875(911,125)2290,205232,386(678,739)3254,921182,668(496,071)4241,486154,846(341,225)5227,256130,400(210,825)6207,148106,364(104,461)7200,01091,901(12,560)8192,39579,10766,547payback9185,09868,104134,65110184,40860,716195,36711179,05052,754248,12012173,28445,686293,80713167,96339,627333,43414166,66535,187368,62115165,22331,214399,835Net Present Value399,835

Required Rate of Return for Project =>11.75%Reinvestment Rate for Project =>4.50% Net Present Value$399,835 Modified IRR9.25%Discounted Payback (years)8.16

Cash Flow Analysis #2 - Include Financing Flows / Discount Rate = Cost of Borrowing:
Matt H. Evans: The preferred approach to cash flow analysis for projects with financing is to exclude financing flows and evaluate only project related cash flows. This way, we can use the appropriate discount rate adjusted for risk. This is how we did it in Cash Flow Analysis #1. However, we can combine both project and financing cash flows. Additionally, instead of adjusting cash flows for interest expense, principal payments on the loan, and depreciation, we will simply use "net" tax amounts to illustrate cash flows for our project. We still come up with the same answer. Example for Year 1 using gross amounts:

Revenues . . . . . $ 535,800Serv Costs . . . . (112,000)Other Costs . . . ( 38,000)Interest Exp . . . ( 45,000)Depreciation . . . (325,000)Taxable Income 15,800Less Taxes . . . . . ( 4,345)Net Income . . . . 11,455Depreciation 325,000Loan Principal ( 83,546)Working Capital ( 29,500)Cash Flow 223,409

NOTE: Don't forget to use only the financing cost rate as your discount rate when combining project and financing cash flows in your cash flow analysis. ServiceOtherTaxableLessNetTax BenefitTax BenefitLoan WorkingCashYearRevenuesCostsCostsIncomeTaxesIncomeDepreciation
Matt H. Evans: We could just deduct depreciation before tax and then add it back to Net Income. Another approach is to simply add back the "tax benefit" of depreciation. You can do it either way!Interest
Matt H. Evans: Interest Expense is a tax deduction. We could have simply deducted the entire interest amount in arriving at Taxable Income. Instead, we added the tax benefit and then deducted the entire loan payment.Payment
Matt H. Evans: Since we did not deduct Interest Expense in arriving at Taxable Income, we show the entire financing cash outflow, but we offset it with the "tax benefit" of interest expense in the previous column. Capital
Matt H. Evans: Net Working Capital does not include interest bearing items, such as Short Term Loan Payable since our discount rate accounts for financing costs.Flow1535,800(112,000)(38,000)385,800(106,095)279,70589,37512,375(128,546)(29,500)223,4092585,900(155,100)(46,500)384,300(105,683)278,61844,68810,307(128,546)(33,100)171,9663612,600(188,600)(54,100)369,900(101,723)268,17822,3448,053(128,546)(35,600)134,4284636,050(202,900)(63,200)369,950(101,736)268,21411,1725,597(128,546)(37,900)118,5365644,112(224,200)(68,900)351,012(96,528)254,48411,1722,919(128,546)(38,400)101,6286653,500(241,600)(72,110)339,790(93,442)246,348 (39,200)207,1487668,200(258,800)(77,800)331,600(91,190)240,410(40,400)200,0108677,400(272,100)(83,100)322,200(88,605)233,595(41,200)192,3959689,800(287,800)(88,900)313,100(86,103)226,998(41,900)185,09810705,300(298,400)(94,200)312,700(85,993)226,708(42,300)184,40811712,900(309,100)(97,800)306,000(84,150)221,850(42,800)179,05012719,600(319,400)(101,050)299,150(82,266)216,884(43,600)173,28413722,800(325,400)(104,900)292,500(80,438)212,063(44,100)167,96314729,100(329,900)(107,800)291,400(80,135)211,265(44,600)166,66515734,300(334,100)(110,100)290,100(79,778)210,323(45,100)165,223

Economic Analysis #2PresentYearCash FlowValuePayback0(1,215,000)(1,215,000) 1223,409209,724(1,005,276) 2171,966151,544(853,731)3134,428111,208(742,523)4118,53692,054(650,469)5101,62874,089(576,380)6207,148141,766(434,614)7200,010128,496(306,118)8192,395116,033(190,085)9185,098104,794(85,291)10184,40898,00812,718payback11179,05089,332102,05012173,28481,159183,20913167,96373,849257,05814166,66568,790325,84815165,22364,017389,865Net Present Value389,865After Tax Cost of Borrowing => 6.53%Reinvestment Rate for Project =>2.50% Net Present Value$389,865 Modified IRR6.38%Discounted Payback (years)10.87Economic Assessment (based on Analysis #1)Project has positive Net Present Value?YesProject has IRR in excess of cost?NoProject has a positive payback?YesProject must meet at least two of the three Economic Criteria, otherwise specialapproval is required.Risk Analysis (based on analysis #1)Risk Premium Applied to Project 2.25%Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:Risk Ranking = 1 for lowest possible risk up to 10 for highest possible riskProbability of Accurate and Reliable Information - Gov't T Bond
Matt H. Evans: There are usually very few unknowns concerning a Government Treasury Bond; yields, payments, and other attributes are usually very certain and thus, the probability of reliable information is extremely high for such an investment.1.00(a)Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)1(b)Exponential power to apply to Risk Ranking is 2 - (a)1(c)Risk Factor = (b) raised to the power (c)1Probability of Accurate and Reliable Information for Project0.65Risk Ranking assigned to project (1 to 10)6 Exponential power to apply to Project1.35 Risk Factor for Project 11Assign probabilities to three possible outcomes for project:PPesimistic outlook, declining growth, slower volumes, etc.10.00%NNormal expected outlook as applied in analysis70.00%OOptomistic outlook, better than expected growth20.00%Total should equal100.00%100.00%Enter Expected Cash Flows for different outcomes:

StandardCoeff ofNet Cash FlowsExpectedDeviationVariationYearPesimistNormalOptomistValue(Abs Risk)(Rel Risk)1321,100339,580361,200342,05630,1060.0882271,600290,205311,950292,69430,2910.1033237,200254,921276,705257,50629,7620.1164224,850241,486261,890243,90327,9010.1145211,800227,256248,605229,98027,9510.1226190,450207,148227,690209,58628,0570.1347184,100200,010220,280202,47327,3250.1358176,350192,395211,650194,64226,5490.1369169,150185,098204,880187,45926,9350.14410168,340184,408203,090186,53726,0780.14011163,100179,050197,450181,13525,7630.14212158,350173,284192,770175,68826,0380.14813153,300167,963185,200169,94423,9580.14114152,820166,665183,990168,74623,5120.13915152,650165,223183,690167,65923,6710.141Totals2,935,1603,174,6893,471,0403,210,006403,8970.126 Absolute Risk of Project (Std Deviation)403,897Relative Risk of Project (Coeff of Variation)0.126

Revised Economic Analysis using Expected ValuesExpectedPresentRecoveryYearValuesValuePayback0(1,215,000)(1,215,000)1342,056306,090(908,910)2292,694234,379(674,531)3257,506184,520(490,011)4243,903156,396(333,614)5229,980131,963(201,651)6209,586107,616(94,035)7202,47393,032(1,002)8194,64280,03079,028payback9187,45968,973148,00110186,53761,417209,41811181,13553,368262,78612175,68846,320309,10613169,94440,095349,20114168,74635,626384,82715167,65931,675416,502Net Present Value416,502 Net Present Value$416,502 Modified IRR9.33%Discounted Payback (years)8.01

Project ECapital Budgeting Analysis forMedical Services USAECanadian PartnershipProject InformationProject Description >Expand Toronto Urban CentersProject Benefits >Market expansion, new source of revenues, leverage of assetsProject Location >TorontoResponsible Division >Canadian DivisionResponsible Department >MarketingContact Person Name >Allen J. HerbertEstimated Project Start Date >04/01/92Classification >8 Justification >CPriority >3 Preliminary ReviewAssign points from 0 to 5 for each of the following project attributes. 0 indicates that the attribute does not apply to the project. 5 is the highest rating, indicating that the project strongly meets this project attribute.Financial Attributes:F1Project improves overall profitability of the company3F2Project lowers cost structure2F3Project will generate a rate of return4F4Project improves asset utilization4F5Other Financial Attribute __________________________________0F6Other Financial Attribute __________________________________0

Operating Attributes:O1Improves operating efficiencies1O2Increases the customer base4O3Improves overall customer service4O4Improves competitive position of company3O5Other Operating Attribute _________________________________0O6Other Operating Attribute _________________________________0

Contingency Attributes:C1Project has options that allow for change during life0C2Project will positively impact company even if value is negative2C3Project can be abandoned easily with some positive value0C4Project permits several options to maximize value0C5Other Cont Attribute _____________________________________0

Miscellaneous Attributes:M1Expands Human Resource Capital0M2Enhances workforce productivity0M3Project meets a critical regulatory, security or specific need0M4Project fits with company strategy and goals3M5Probability of project success is very high / low risk2M6Other Misc Attribute _____________________________________0M7Other Misc Attribute _____________________________________0M8Other Misc Attribute _____________________________________0

Total Preliminary Points32

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceedwith analysis and submission.

Project Summary

In order to establish a toehold position in the Toronto area, a joint venture investment will be made since the current major provider in Toronto needs improved child care services for theurban areas of Toronto. Medical Services USA will provide personnel and overall managementfor urban child care. In return, Medical Services USA will share in the profits 50% / 50%. The JointVenture Agreement has a ten year term period.

Financial Analysis (all amounts are expressed in Canadian Dollars)Convert to U.S.$ * Initial Relocation / Setup Costs$750,0001.12$840,000 Ten Year Projected Income Statement Adj toEstimatedYearSalesCost ofIncomeLessNetCashCash50%Convert (100%)Servicebefore TaxTaxesIncomeFlowFlowShareto U.S.$ *1 **637,500270,000367,50079,500288,00042,000330,000165,0001.15189,7502895,000366,000529,000119,000410,00082,000492,000246,0001.18290,2803912,000377,000535,000101,000434,00055,000489,000244,5001.21295,8454942,000378,000564,000104,000460,00068,000528,000264,0001.20316,8005977,000370,000607,000112,000495,00088,000583,000291,5001.17341,05561,015,000368,000647,000129,000518,00090,000608,000304,0001.17355,68071,045,000362,000683,000140,000543,000110,000653,000326,5001.17382,00581,088,000355,000733,000138,000595,000115,000710,000355,0001.17415,35091,135,000350,000785,000151,000634,000122,000756,000378,0001.17442,260101,180,000348,000832,000157,000675,000135,000810,000405,0001.17473,850

* convert from Canadian Dollars to U.S. Dollars** partial year in 1992Economic Analysis (U.S. Dollars) Summarize Cash Outflows and Inflows for Project: CashPresent YearFlowsValuePayback 0(840,000)(840,000) 1189,750167,181(672,819) 2290,280225,333(447,486) 3295,845202,338(245,148) 4316,800190,898(54,250) 5341,055181,069126,819 6355,680166,374293,193 7382,005157,434450,6268415,350150,816601,4429442,260141,486742,92910473,850133,562876,491Net Present Value876,491Required Rate of Return for Project =>13.50%Reinvestment Rate for Project =>3.50%Net Present Value $876,491 Modified IRR16.95%Discounted Payback (years)5.30Economic AssessmentProject has positive Net Present Value?YesProject has IRR in excess of cost?YesProject has a positive payback?YesProject must meet at least two of the three Economic Criteria, otherwise specialapproval is required.Risk AnalysisRisk Premium Applied to Project 4.00%Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:Risk Ranking = 1 for lowest possible risk up to 10 for highest possible riskProbability of Accurate and Reliable Information - Gov't T Bond
Matt H. Evans: There are usually very few unknowns concerning a Government Treasury Bond; yields, payments, and other attributes are usually very certain and thus, the probability of reliable information is extremely high for such an investment.1.00(a)Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)1(b)Exponential power to apply to Risk Ranking is 2 - (a)1(c)Risk Factor = (b) raised to the power (c)1Probability of Accurate and Reliable Information for Project0.6Risk Ranking assigned to project (1 to 10)6 Exponential power to apply to Project1.4 Risk Factor for Project 12Assign probabilities to three possible outcomes for project:PPesimistic outlook, declining growth, slower volumes, etc.25.00%NNormal expected outlook as applied in analysis50.00%OOptomistic outlook, better than expected growth25.00%Total should equal100.00%100.00%Enter Expected Cash Flows for different outcomes:

StandardCoeff ofNet Cash FlowsExpectedDeviationVariationYearPesimistNormalOptomistValue(Abs Risk)(Rel Risk)1132,000189,750198,500177,50055,6850.3142227,300290,280311,100279,74066,7080.2383239,100295,845315,200286,49860,4210.2114244,050316,800340,500304,53876,8710.2525267,800341,055368,500329,60379,3040.2416285,200355,680387,500346,01579,1710.2297307,900382,005416,900372,20384,0060.2268329,100415,350460,900405,175100,3910.2489363,300442,260484,800433,15592,3520.21310380,050473,850517,100461,213105,8450.2292,775,8003,502,8753,801,0003,395,638800,7540.236Absolute Risk of Project (Std Deviation)800,754Relative Risk of Project (Coeff of Variation)0.236

Revised Economic Analysis using Expected ValuesExpectedPresentRecoveryYearValuesValuePayback0(840,000)(840,000)1177,500156,388(683,612)2279,740217,152(466,461)3286,498195,945(270,516)4304,538183,509(87,007)5329,603174,98987,9826346,015161,853249,8357372,203153,394403,2288405,175147,121550,3509433,155138,574688,92310461,213130,000818,923Net Present Value818,923Net Present Value$818,923 Modified IRR16.58%Discounted Payback (years)5.50

Project FCapital Budgeting Analysis forMedical Services USAFRegulatory Compliance NEProject InformationProject Description >Regulatory Compliance in NEProject Benefits >ComplianceProject Location >Northeast Regional Office - Boston, MAResponsible Division >FinanceResponsible Department >FinanceContact Person Name >Carl Jackson, V.P. FinanceEstimated Project Start Date >01/01/92Classification >9 Justification >EPriority >2

Preliminary ReviewAssign points from 0 to 5 for each of the following project attributes. 0 indicates that the attribute does not apply to the project. 5 is the highest rating, indicating that the project strongly meets this project attribute.Financial Attributes:F1Project improves overall profitability of the company2F2Project lowers cost structure3F3Project will generate a rate of return4F4Project improves asset utilization3F5Other Financial Attribute __________________________________0F6Other Financial Attribute __________________________________0

Operating Attributes:O1Improves operating efficiencies2O2Increases the customer base3O3Improves overall customer service3O4Improves competitive position of company2O5Other Operating Attribute _________________________________0O6Other Operating Attribute _________________________________0

Contingency Attributes:C1Project has options that allow for change during life3C2Project will positively impact company even if value is negative1C3Project can be abandoned easily with some positive value0C4Project permits several options to maximize value0C5Other Cont Attribute _____________________________________0

Miscellaneous Attributes:M1Expands Human Resource Capital0M2Enhances workforce productivity0M3Project meets a critical regulatory, security or specific need5M4Project fits with company strategy and goals2M5Probability of project success is very high / low risk1M6Other Misc Attribute _____________________________________0M7Other Misc Attribute _____________________________________0M8Other Misc Attribute _____________________________________0

Total Preliminary Points34

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceedwith analysis and submission.

Project Summary

A major regulatory change is expected to change certain services in the Northeastern United States.In order to meet this new mandate, an investment is required in field personnel, training, andequipment. Revenues from the new services are also forecasted based on demand in Californiawhich adopted this regulatory change two years ago. The regulatory change is subject to futuremodification and therefore, the project is only projected over two years on a month to month basis.There is no initial investment required for this project.Economic Analysis (Cash Flows by Month) MonthlyPeriodSetupServiceMisc / TotalNet CashPresentPresentDateRevenuesCostsCostsTaxesOutflowsFlowValueValue (simple calc)(functional)131-Jan-9235,200-16,000-3,500-2,500-22,00013,20013,12913,129228-Feb-9239,400-5,000-3,500-2,000-10,50028,90028,58928,590331-Mar-9241,000-3,500-3,500-2,000-9,00032,00031,48631,488430-Apr-9242,550-1,500-4,000-1,750-7,25035,30034,54534,551531-May-9243,990-1,500-4,000-1,750-7,25036,74035,76135,771630-Jun-9244,550-2,000-4,000-1,750-7,75036,80035,62635,642731-Jul-9245,100-4,500-1,650-6,15038,95037,50537,527831-Aug-9246,990-4,500-1,650-6,15040,84039,11339,144930-Sep-9247,800-4,500-1,650-6,15041,65039,67339,7141031-Oct-9248,650-5,100-1,500-6,60042,05039,83939,8891130-Nov-9249,280-5,100-1,500-6,60042,68040,21840,2801231-Dec-9248,300-5,100-1,500-6,60041,70039,08339,155 1992 Total532,810-102,0001331-Jan-9347,100-10,000-5,800-1,350-17,15029,95027,91927,9801428-Feb-9345,500-2,000-5,800-1,350-9,15036,35033,70233,7881531-Mar-9344,100-5,800-1,350-7,15036,95034,07434,1731630-Apr-9342,400-6,200-1,275-7,47534,92532,03332,1401731-May-9341,000-6,200-1,275-7,47533,52530,58330,6981830-Jun-9339,100-6,200-1,275-7,47531,62528,69528,8151931-Jul-9338,500-6,750-1,205-7,95530,54527,56527,6952031-Aug-9337,900-6,750-1,205-7,95529,94526,87827,0182130-Sep-9337,100-6,750-1,205-7,95529,14526,01926,1682231-Oct-9336,800-7,000-1,170-8,17028,63025,42225,5822330-Nov-9336,400-7,000-1,170-8,17028,23024,93225,1032431-Dec-9336,000-5,000-7,000-1,170-13,17022,83020,05420,204 1993 Total481,900-109,250Total1,014,710 -211,250 752,443754,244 AnnualMonthlyRequired Rate of Return for Project =>6.50%0.54%Calculate IRR (annual basis):Net Present Value 752,443AnnualAnnualRate of Return (IRR Annual Basis)419%
JFI: Since we have monthly cash flows, we would use the XIRR Function. However, Microsoft Excel does not accept an "array" for input values for the XIRR Function; but the IRR Financial Function doesl accept a "mix" or array of values. Since we have both positive and negative cash flows for each period, we have a mix or arrary of values and only the IRR Function will work. In order to use the IRR function, we will summarize cash flows on an annual basis. We could also use the Solver Function to solve for finding the rate where the discounted inflows = discounted outflows.

NOTE: Negative values need to come first in the array or range that Excel uses to calculate the IRR. OutflowInflowDiscounted Payback Immediate0-102,000532,810-109,250481,900Economic AssessmentProject has positive Net Present Value?YesProject has IRR in excess of cost?YesProject has a positive payback?YesProject must meet at least two of the three Economic Criteria, otherwise specialapproval is required.Risk AnalysisRisk Premium Applied to Project 0.00%(Required for Compliance)Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:Risk Ranking = 1 for lowest possible risk up to 10 for highest possible riskProbability of Accurate and Reliable Information - Gov't T Bond
Matt H. Evans: There are usually very few unknowns concerning a Government Treasury Bond; yields, payments, and other attributes are usually very certain and thus, the probability of reliable information is extremely high for such an investment.1.00(a)Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)1(b)Exponential power to apply to Risk Ranking is 2 - (a)1(c)Risk Factor = (b) raised to the power (c)1Probability of Accurate and Reliable Information for Project0.75Risk Ranking assigned to project (1 to 10)4 Exponential power to apply to Project1.25 Risk Factor for Project 6Assign probabilities to three possible outcomes for project:PPesimistic outlook, declining growth, slower volumes, etc.15.00%NNormal expected outlook as applied in analysis65.00%OOptomistic outlook, better than expected growth20.00%Total should equal100.00%100.00%Enter Expected Cash Flows for different outcomes:

StandardCoeff ofAdjustedAdjustedNet Cash FlowsExpectedDeviationVariationInflowsOutflowsMonthPesimistNormalOptomistValue(Abs Risk)(Rel Risk)112,05013,12913,70013,0811,2000.092226,20028,58929,90028,4932,6840.094328,83031,48632,92031,3742,9710.095431,39034,54536,05034,3733,4170.099532,71035,76137,43035,6373,4250.096632,60035,62637,25035,4973,3790.095734,17037,50539,25037,3543,6990.099835,87039,11340,90038,9843,6480.094936,27539,67341,47039,5233,7800.0961036,51039,83941,68039,7083,7480.0941136,81040,21842,05040,0733,8080.0951235,86039,08340,92038,9673,6600.094Annual Sub Total413,0631325,62027,91929,20027,8302,5940.0931430,85033,70235,24033,5823,1890.0951531,17034,07435,63033,9503,2420.0951629,35032,03333,51031,9263,0170.0951727,96030,58331,92030,4572,8890.0951826,30028,69530,01028,5992,6910.0941925,12027,56528,85027,4562,7150.0992024,47026,87828,14026,7692,6720.1002123,69026,01927,30025,9262,6190.1012223,15025,42226,70025,3372,5700.1012322,66024,93226,20024,8452,5650.1032418,23020,05421,10019,9902,0750.104Annual Sub Total336,665687,845752,443787,320749,72972,2590.096Absolute Risk of Project (Std Deviation)72,259Relative Risk of Project (Coeff of Variation)0.096

Revised Economic Analysis using Expected ValuesExpectedPresent DatesValuesValue 113,12913,058228,58928,282331,48630,979434,54533,807535,76134,808635,62634,490737,50536,113839,11337,458939,67337,7911039,83937,7441140,21837,8981239,08336,6291327,91926,0251433,70231,2471534,07431,4221632,03329,3811730,58327,9001828,69526,0361927,56524,8762026,87824,1262126,01923,2292225,42222,5732324,93222,0192420,05417,615Calculate IRR (annual basis):Net Present Value705,507AnnualAnnualNet Present Value $705,507OutflowInflowRate of Return (IRR Annual Basis)298.86%Discounted Payback Immediate0-102,000413,063-109,250336,665

SummaryCapital Budgeting Analysis forMedical Services USA9.50% Solver. We will solve for a Target Cell, asking Solver to find the maximum or minimum values by changing a set of variables (cells) given a set of constraints.

Financial Modeling Textbooks provide useful examples of how Excel Solver can be used to solve for capital budgeting program decisions given a set of constraints. The following example will illustrate how we could apply Solver for finding the right set of projects given a set of contraints:Example:Objective: Maximize Net Present Value of Projects Contraints:Year 1: Only $ 200,000 can be spent on all capital projects Year 2: Only $ 150,000 can be spent on all capital projectsYear 3: Only $ 120,000 can be spent on all capital projectsYear 4: Only $ 100,000 can be spent on all capital projectsYear 5: Only $ 75,000 can be spent on all capital projectsFive Projects require investments over five years and have the following Net Present Values:Select?Project0 = No< - - - - - Five Year Capital Budgets for Each Project - - - - - >Ref1 = YesProject NameNPVYear 1Year 2Year 3Year 4Year 5 A1
JFI: Solver will change these values since these are the "variables" in our problem. Solver will also produce a report - Answer Report 1.Annual Marketing Program650,00045,00040,00038,00035,00035,000B0IT Infrastructure Development820,00055,00060,00060,00058,00055,000C1Executive Leadership540,00025,00020,00020,00018,00017,000D1HR Capital Improvement701,00035,00030,00030,00028,00027,000E0Product Research490,00050,00045,00042,00040,00040,000 Total (SumProduct)1,806,385
JFI: This is the "set" cell we will use with Solver.99,051
JFI: Constraints used with Solver start with this cell. We need to make sure we compare an equal set of arrays; I.e. compare the arrary or range E43:I43 against the range E44:I44.

85,28283,67277,15475,000Maximum Allowed Budget200,000150,000120,000100,00075,000We will enter the following constraints into Solver:$ 45,000 A + $ 55,000 B + $ 25,000 C + $ 35,000 D + $ 50,000 E .LE. $ 200,000LE: Less than or Equal to$ 40,000 A + $ 60,000 B + $ 20,000 C + $ 30,000 D + $ 45,000 E .LE. $ 150,000$ 38,000 A + $ 60,000 B + $ 20,000 C + $ 30,000 D + $ 42,000 E .LE. $ 120,000$ 35,000 A + $ 58,000 B + $ 18,000 C + $ 28,000 D + $ 40,000 E .LE. $ 100,000$ 35,000 A + $ 55,000 B + $ 17,000 C + $ 27,000 D + $ 40,000 E .LE. $ 75,000Each of the above constraints recognizes that we can spend no more than what is budgeted each year. We alsohave the equation we are trying to solve for: Maximize NPV = $ 650,000 A + $ 820,000 B + $ 540,000 C + $ 701,000 D + $ 490,000 EWe will also use as our variables "0" for No and "1" for Yes as to which projects we should select given the aboveconstraints and equation. The "maximum" NPV will show up in our "set" cell which is cell D43.Now go to the main toolbar, select Tools -> Solver and enter the following:1. Target Cell is D432. Equal to: Select the Max button since we are solving for maximum values.3. By Changing Cells: Select the range B38:B42 as our variables.4. Subject to Constraints: Add two contraints as follows:B38:B42 .EQ. Binary
JFI: Constraints in Solver consists of three components:

1. Cell Reference (such as $B$38:$B$42)2. Operator (such as bin for binary)3. Constraint (default is binary when bin is operator)EQ or = (equal)E43:I43 .LE. E44:I44LE or